Despite the significant infusion of funds from the American Rescue Plan Act (ARPA) and the Bipartisan Infrastructure Law (BIL), Fitch Ratings said it estimates a funding gap in excess of $85 billion over the next five years for water and sewer utilities that will need to be covered by paygo or additional debt. According to Fitch, federal funding under ARPA and the BIL is supportive of water utility credit quality as it helps maintain and improve existing infrastructure, thereby moderating increases in Fitch’s life cycle ratio, a measure of the age of capital assets. Federal grants under these laws also offset some of the need for new debt funding and significant rate increases to address capital plans, supporting overall affordability. Utilities face increasing capex costs given inflation, aging infrastructure, and the U.S. Environmental Protection Agency (EPA) mandates and proposed rules, namely per- and polyfluoroalkyl substances (PFAS) remediation, Lead and Copper Rule Revisions (2021) and Lead and Copper Rule Improvements (2023), which would require most water systems to replace lead service lines within 10 years. Water supply and sewer construction spending were up 15.3% and 27.2%, respectively, in October 2023 from a year ago, according to Census data. Within the Fitch-rated portfolio, five-year capex/depreciation ratios have been increasing year over year, exceeding 150% since 2019, reflecting sustained, robust capital spending. This spending has kept the Fitch-calculated life cycle ratio relatively stable at around 37% for the last several years.
Source: Water Finance & Management